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Working out whether the pot lasts
Retirement planning has two halves that are usually calculated separately and need to be read together. The first is accumulation: what the pot grows to by the time you stop working. The second is drawdown: how long that pot survives the income you take from it. A plan that only solves the first half tends to produce a reassuring number that means very little.
The target
Start from spending, not from a round number. If you expect to need $45,000 a year from your own savings, after state pension or social security, the conventional rule of thumb is that you need around 25 times that, so $1,125,000. The 25× figure comes from the 4% guideline: a portfolio withdrawn at 4% in year one, then adjusted for inflation, has historically lasted thirty years in most periods.
| Annual income from savings | At 4% withdrawal | At 3.5% | At 3% |
|---|---|---|---|
| $30,000 | $750,000 | $857,000 | $1,000,000 |
| $45,000 | $1,125,000 | $1,286,000 | $1,500,000 |
| $60,000 | $1,500,000 | $1,714,000 | $2,000,000 |
| $80,000 | $2,000,000 | $2,286,000 | $2,667,000 |
The lower withdrawal rates in that table are not pessimism for its own sake. They reflect longer retirements and the possibility of a weaker-than-average sequence of returns. A 30-year-old planning for a retirement that might last 35 years should lean towards 3.5%.
Sequence of returns risk
This is the single biggest difference between accumulating and drawing down. While you are saving, a market fall is a discount. Once you are withdrawing, a fall early in retirement is permanent damage, because the money you take out during the drop is never there to recover.
Two retirees with identical average returns over thirty years can end up with wildly different outcomes depending on whether the bad years came first or last. The usual defences are holding two to three years of spending in cash or short bonds, and being willing to cut withdrawals in a bad year rather than selling into a falling market.
Inflation over a thirty-year retirement
At 3% inflation, prices double in about 24 years. A retirement income of $45,000 that is not indexed buys roughly $22,000 of today's goods by year 24. Any plan that fixes the withdrawal in nominal terms is planning for poverty in the second half of retirement, which is exactly when care costs tend to arrive.
Check whether each income source is inflation-linked. State pensions usually are. Most private annuities are not unless you pay for the escalation, and a level annuity that looks generous at 65 looks thin at 85.
Starting late
The arithmetic is harsher but not hopeless, and the three available levers are contributions, time and spending. Someone starting at 45 with $60,000 saved, aiming for $800,000 by 67 at 6% real:
| Retire at | Years | Monthly contribution needed |
|---|---|---|
| 62 | 17 | $1,790 |
| 65 | 20 | $1,310 |
| 67 | 22 | $1,080 |
| 70 | 25 | $800 |
Three extra years of work between 62 and 65 cut the required monthly contribution by $480. Working longer is usually the most powerful lever available late, because it adds contributions, adds growth and removes years of withdrawals at the same time.
A worked example
A 40-year-old with $120,000 saved, contributing $900 a month, assuming 6.5% nominal growth, reaches about $1,090,000 at 67. Withdrawing at 4% gives $43,600 in the first year. If inflation averages 2.5%, that $1.09m is worth around $560,000 in today's money and the first-year income is worth about $22,400 of today's spending. If that is not enough, the fix is more contributions, later retirement or lower expected spending, in roughly that order of effectiveness.
Frequently Asked Questions (FAQs)
Is the 4% rule still valid?
It remains a reasonable starting point and it was never a guarantee. It came from US historical data over 30-year retirements with a balanced portfolio. Critics point to lower expected returns and longer lifespans, and suggest 3.3% to 3.5% for a modern 35-year plan. Treat it as a planning anchor you adjust, not a law.
How much should I have saved by each age?
Common benchmarks are one times salary by 30, three times by 40, six times by 50, eight times by 60 and ten times by 67. They are crude because they ignore pensions, spending and household structure, but they are useful for spotting that you are far behind rather than slightly behind.
Should I include social security or a state pension?
Yes, as a reduction in what your own savings must provide, not as a replacement for them. Work out your expected benefit, subtract it from your target spending, and size the portfolio against the remainder. That is what the 25× multiple should be applied to.
What return should I assume after I retire?
Usually lower than during accumulation, because portfolios normally shift towards bonds. Many planners assume 4% to 5% nominal in drawdown against 6% to 8% while accumulating. Using the same high rate for both halves makes the plan look safer than it is.
What about healthcare and long-term care?
They are the largest uncosted item in most plans and they rise faster than general inflation. Budget for them explicitly rather than assuming spending falls smoothly with age; the common pattern is high spending early in retirement, lower in the middle, and high again at the end.
Does it matter which account I save in?
A great deal. Tax-sheltered accounts compound without annual drag and often carry an employer match, which is an immediate return no market can promise. The usual order is: capture the full match, clear high-interest debt, fill tax-advantaged space, then use taxable accounts.
What if I am going to work part time in retirement?
Treat the earnings as an income source that reduces withdrawals for those years. Even modest part-time income in the first five years helps disproportionately, because it protects the portfolio during the window when sequence risk is highest.